IR35 is a piece of anti-tax avoidance legislation set up by the UK government to curb tax-avoidance by workers supplying their services to clients via an intermediary like a limited company.
What Does IR35 Mean For Businesses and Contractors?
From April 2020, any workers who do not meet the criteria for ‘self-employed’ will fall inside of IR35, and could carry significant risk for both the contractor and the end client.
Having previously targeted the public sector, HMRC are now focusing on the private sector. The responsibility for setting IR35 status will be placed on the private sector companies that source or utilise limited company workers. What’s more, the liability for this will likewise fall on the end client, who could be faced with hefty fines if they’re found to be in violation of the law.
The financial implications for IR35 are also significant for workers, it could reduce total net income by up to 25%.
All workers must be individually assessed to see if they fall within IR35. This is a complex process as there are many different factors at play.
The law has been in force since 1999, but recent changes have brought it back into public consciousness. In that time it’s been widely criticised for making life harder for small businesses.
It was introduced to tackle the problem of ‘disguised employment’, where businesses take on workers on a self-employed basis, so there’s no legally binding employment contract in the traditional sense. This was a practice some businesses engaged in to save money, as they didn’t have to pay NICs or offer employee benefits. The benefit for contractors is tax efficiency.
In theory, the law should protect workers from being abused, while also ensuring the country gets the appropriate amount of tax.
Problems with IR35
Both contractors and businesses find the legislation complicated. Even the government has made mistakes in some cases when disputes have gone to tribunals. There is a general lack of clarity over what constitutes IR35 status. Luckily, HMRC has a tool to assess tax status.
Am I Compliant?
If you’re a contractor working out whether IR35 applies to a contract, there are a few principles to consider as part of a checklist.
In general, IR35 won’t apply if the contract is for services rather than employment. To make sure you’re compliant, you should see whether the contract specifically mentions these principles:
- supervision, direction, control – this relates to how much say your client has over how you complete your work. For example, if you’re contracted to work at certain times, this implies employment. If you’re free to choose how and when you work, you’re likely not within IR35.
- substitution – could you bring someone else in to complete the contract, or do you need to do the work yourself? If you can’t send someone else, you’re likely to be within IR35.
- mutuality of obligation (MOO) – is there an obligation on the employer’s end to offer work, and do you have to accept it? This is called mutuality of obligation, and if it exists, the contract will fall within IR35. If you’re self-employed, once you’ve completed the initial project you were hired to work on, you should be under no obligation to continue working on something else. Also, if you’re not allowed to take over work, that points towards a more traditional model of employment.
IR35 is an important factor to consider whether you’re a contractor or a business involved limited company contractor recruitment.
VHR will be ensuring all our candidates and clients are compliant with the legislation.